Hedge Fund Performance Forces Cuts

Hedge funds across the world are cutting trading desk resources as pressures on the financial industry continue. In a recent Greenwich Associates survey reported by Bloomberg, 44 percent of hedge funds indicated that they will reduce their spending on trading activities this year in comparison to 2011. This is largely the result of increasing pressure on funds to reduce costs as they struggle to justify their management fees in the light of rising equity markets.

Hedge Fund Performance Weak so far in 2012

So far in 2012, hedge funds have largely trailed comparable equity indices, with Reuters reporting that equity focused hedge funds had gained only 5.8 percent in the nine months ended September 30, 2012, while the S&P 500 index gained 16.4 percent. While certain funds have seen success in 2012, such as Daniel Loeb’s Third Point Offshore Fund with a 10.9 percent gain and the Tiger Global fund posting a 22.4 percent gain, the majority of equity focused funds have struggled. This has made it difficult for fund managers to justify their management fees, which are usually considerably higher than fees charged by equity index funds, to investors. In order to reduce costs, such funds are slashing their trading budgets.

This underperformance is clearly reflected in the Greenwich report. While 44 percent of hedge funds are expected to reduce staffing levels, only 20 percent of a broader basket of financial companies are expected to cut trading expenses, and 30 percent actually expect to expand their desks. Investor money generally follows returns and this is no more evident than in the hiring intentions of money managers across various investment classes.

Return to the Roots of Hedge Funds May Create Limited Opportunities

While certain investors certainly will struggle with the current performance of hedge funds in comparison to potential investments in equity indices, they don’t have to look far in the past to find times when hedge funds were the star performers. The reality is that hedge funds are designed to offer consistent returns through time and not necessarily track or outperform an equity index during every single time period. Current uncertainties in the markets are forcing portfolio managers to look for alternative asset classes that offer returns that are not linked to equity indexes, but that are higher than current historically low fixed income yields. This offers some promise to hedge funds that have produced consistent results over long periods of time.

Even the Greenwich report suggests some upside for those looking for trading opportunities in the hedge fund sector. While it’s true that the majority of hedge funds were reducing trading staff or holding steady at current levels, 17 percent of funds planned an increase in resources for the year. This is likely focused on high performing funds that are constantly attracting more capital, or hedge funds focused on consistent returns that are drawing investor money as an alternative to low fixed income yields.

Job Seekers see a Mixed Outlook

Overall, the outlook remains mixed, with more downside than upside, for those looking for trading work in the hedge fund sector. While select high performing funds are growing their trading operations, the majority are holding steady or cutting staff. This means that competition will be fierce for the limited opportunities that are available. Those looking for work in this sector should be prepared with advanced education in finance and several years of experience with strong results in order to be a star candidate for an available position.

Over time, if fixed income yields remain low, a greater shift may occur towards the hedge fund industry in terms of investor capital. This could generate further employment opportunities down the line, but this could be years off, or in the case of a rebound in bond yields, it could never happen at all. It remains advisable to be opportunistic in this industry, seizing upon any available opening when possible.